How Sustainable Investing Fits Into a Long-Term Strategy

What does ESG really mean—and how does it fit into an investment strategy?

Our newest blog breaks down sustainable investing, from environmental and social factors to governance practices, and explains how investors can align personal values with informed decision-making.

How Sustainable Investing Fits into a Long-Term Strategy

What are your core values? Many of us might cite responsibility, honesty, and fairness, among others.

For those of us who want to align our investments with such values, there is a plausible solution: sustainable investing, sometimes described as ESG.

“ESG” stands for the environmental, social, and governance criteria that sustainable investors use to assess companies. These lenses are employed in addition to traditional financial analysis of profitability, creditworthiness, and the growth potential of a company.

Sustainable investors want to change the world for the better. This is reflected in the companies and funds they choose to invest in or avoid. It can also be expressed in how they vote at annual shareholder meetings, and the ways they engage with management to improve companies’ business standards.

Importantly, sustainable investing is also about striving to mitigate risks associated with climate change (e.g. rising sea levels), as well as mismanagement, corruption, environmental disasters, and labor unrest. Think BP’s Deepwater Horizon oil spill in 2010, or the collapse of Enron due to accounting fraud in 2001, or Boeing’s 737 Max crashes in the early 2020’s, and the ensuing coverups, investigations and lawsuits.

Finally, sustainable investing also considers long-term investment outcomes. Many investors believe that well-managed companies may be better positioned for durability and resilience over time. Research indicates that sustainable, or ESG-focused, versions of leading indices such as the S&P 500 or the MSCI All Country World Index have, over certain periods, outperformed their conventional counterparts. In this way, investors may be able to align their investments with their values without necessarily sacrificing long-term performance objectives.

For stock pickers, rating agencies like Standard & Poor's offer ESG rankings for most publicly traded companies. Easier still, investors can choose to invest in the wide assortment of mutual and exchange traded funds that follow sustainable guidelines.

At a time when our planet is under increasing threat, and when climate-related risks to business are multiplying, sustainable investing offers a way to address these issues. ESG looks at the impact of a corporation’s business activities on the environment (the “E”). Is the company working to reduce carbon emissions and managing the risks of industrial accidents? What is its effect on biodiversity? Is it taking responsibility for mitigating its impact?

ESG funds tend to avoid investing in fossil fuels, considered by most scientists to be the main culprit in the rise of global temperatures and increasing frequency of lethal floods, fires, and hurricanes. ESG investors may also choose to invest in companies that offer solutions to the environmental crisis through renewable energy, water treatment, and pollution remediation.

Social criteria (the “S”) assess company relationships with their employees, customers, and community. Do they treat their workers fairly? Do they offer adequate employee benefits and workplace safety? Are women paid equally to men and given the same career opportunities? Are people of color and other minorities protected from discrimination?

Sustainable investors consider whether a company’s product, either by intention or through ordinary use, hurts people. Private prisons, tobacco, civilian handguns, chemical weapons, landmines, and cluster munitions, fall into this category. Furthermore, are products safe, of good quality, and ethically marketed? Are customers treated fairly, and their personal data protected? And does a company give back to its community?

Governance (the “G”) is the third ESG lens. Sustainable investors look for companies that are well managed and conscientious in their business practices.

Is a company’s board of directors independent and capable of overseeing the business? Does it include women? Does the compensation of top executives reflect their job performance? Are the concerns of shareholders considered by management? And is the company transparent about its environmental and social impacts?

Sustainable investing reflects values many people hold as fundamental: responsibility, transparency, respect for others, and stewardship of our planet. These principles continue to guide thoughtful long-term decision-making.

If aligning your investments with your values is important to you, connect with an EP Wealth advisor to explore how sustainable investing considerations may fit into your overall financial plan.

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